Although drug spending represents only 12 percent of total health costs, it is rising at an annual rate of 10 percent to 12 percent -- more than four times the rate of inflation -- and will soon overtake physician fees as the second largest part of the health care bill, after hospitalization costs.
To a large extent, the volatility of prescription drug plan costs comes from underlying marketplace and demographic factors. They include:
* The accelerated rate of drugs being approved by the U.S. Food and Drug Administration, including drugs that provide more effective treatment than older drugs or first-time treatment
* The pharmaceutical manufacturers' increase in the cost of drugs already on the market
* The marketing to physicians and consumers by pharmaceutical companies
* Higher utilization of drugs as an employer's work force ages
* The longer life expectancy of retirees, who have the highest per capita utilization of prescription drugs
Higher prices account for about 64 percent of the increased costs; increased utilization accounts for 36 percent. Driving the increase in the average cost of drugs is the widespread use of costlier new drugs, which can often cost twice as much as older drugs.
Unfortunately, the recent trend in drug spending is likely to continue. The pharmaceutical industry is both research-intensive and marketing-intensive. Many new drugs are in the pipeline, and computerized techniques are speeding up development.
These advances coincide with demographic trends, such as the aging of baby boomers, which will greatly increase the number of Americans at risk for developing costly chronic and potentially disabling conditions.
Many factors are outside the plan sponsor's control, but there are many within a plan sponsor's control that affect prescription drug costs, including participant cost-sharing and other key plan design issues, and financial terms agreed to with the pharmacy benefit manager (PBM), including discounts, dispensing fees and administrative fees.
Success in managing prescription drug costs requires plan sponsors to formulate and implement a well-constructed strategy that:
* Establishes realistic objectives for the prescription drug program
* Sets realistic cost-sharing for employees and retiree plan participants and the plan sponsor
* Results in implementation of proven managed care programs that promote effective and appropriate participant utilization of prescription drugs
* Enables selection of an appropriate PBM that will meet plan sponsor objectives
* Achieves optimum pricing of prescription drugs and other favorable financial terms through negotiations with a qualified PBM
Employers are seeking more aggressive ways to manage prescription drug costs. One such way is coinsurance, where employees are asked to pay a percentage of drug costs rather than a flat co-pay. These arrangements may require employees to pay a flat percentage, or may combine a percentage contribution with minimum and maximum out-of-pocket costs.
According to Hewitt Associates, approximately 40 percent of large firms are using coinsurance strategies and another 5 percent are planning to adopt them this year, an increase from 19 percent in 2002.
The purpose of a coinsurance plan is to encourage plan participants to be smart consumers by shopping around for the most effective medication at the lowest price, saving money for themselves and their employer. In this way, the cost of prescription drugs becomes more transparent to employees, whereas with co-payment arrangements, they are unaware of the true cost.
However, there can be drawbacks to coinsurance. As coinsurance plans become increasingly utilized, employers must protect employees from financial problems. Many employers who adopt a coinsurance model are using flat co-payments for generics, combined with maximum out-of-pocket costs. This can avoid a situation in which employees do not fill a prescription because the cost to them is too great.
Effective management of prescription drug plan costs requires a fundamental understanding of and experience with the workings of these plans and the economics of the prescription drug marketplace.
Sally L. Stephens, R.N., is president of Spectrum Health Systems. Stephens founded Spectrum Health Systems, an independent health management company, in 1997 to provide Fortune 100 quality health risk management programs to middle-market employers. Reach her at (317) 573-7600 or firstname.lastname@example.org.